8665. Is a bad debt deduction permitted when a debt is only partially worthless?Alexis Longrcline202014-07-07T22:48:00Z2014-07-07T22:48:00Z12721556Hewlett-Packard1231825148665. Is a bad debt deduction permitted when a debt is only partially worthless?Certain taxpayers are entitled to claim a deduction for business bad debts that become only partially worthless during the tax year..IRC Sec. 166(a)(2), Treas. Reg. §1.166-3. The allowable deduction cannot exceed the amount of the debt charged-off (see Q 8664) during the tax year..Treas. Reg. §1.166-3(a)(2)(iii). The taxpayer must be able to clearly show the portion of the debt that has become partially worthless and must also show that the entire debt did not become worthless during the taxable year. Despite this, a taxpayer is not required to charge-off and deduct partially worthless debts each year. Taxpayers are permitted to delay the bad debt deduction until the year in which the debt has become completely worthless. Planning Point: Though a taxpayer is not required to claim a bad debt deduction in years when the debt is only partially worthless, the taxpayer is not permitted to claim the deduction for tax years beginning after the year in which the debt becomes completely worthless..See IRS Publication 535.If a taxpayer chooses to claim the deduction for partial worthlessness, the taxpayer’s deduction in the year in which the debt becomes completely worthless is limited to the remaining basis in the debt..IRC Sec. 166(b) and Treas. Reg. §1.166-3(a)(2)(iii), (b). Not all taxpayers can claim a bad debt deduction if the debt is only partially worthless. IRC Section 166(d)(1) prohibits taxpayers “other than a corporation” from claiming a deduction for partially worthless nonbusiness debts. If a debtor and a creditor reach a compromise agreement pursuant to which the creditor agrees to accept a lesser amount than what is owed, it is arguable that a partially worthless debt would result. However, the IRS has consistently refused to grant a deduction for partially worthless debts resulting from compromise agreements and the courts have agreed with this position..Raffold Process Corp. v. Comm., 153 F.2d 168 (1946); Bingham v. Comm., 105 F.2d 971 (1939); Haskel v. Comm., TC Memo 1980-243. See D'Alonzo v.Comm., 10 TCM 817 (1951); Bohn v. Comm.., 43 BTA 953 (1941).